Will Rogers Knew Trickle Up Won't Increase Money Velocity

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/bonds/will-rogers-knew-trickle-up-wont-increase-money-velocity?post=119150&uid=4798

Money theory is mostly a fraud to convince people that regular folks should not accumulate too much money. The economists all fear money velocity. They are likely very well meaning and are textbook sound, but certainly they do unknowingly help advance what I believe to be a scam. The following statement by Will Rogers is worth more than all the economists put into a basket as to its veracity about the ridiculousness of fearing a little money velocity:
This election was lost four and six years ago, not this year. They [Republicans] didn’t start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows hands. They saved the big banks, but the little ones went up the flue. Nov 27, 1932
Velocity of Money

Traditional money theory posits that the velocity of money increases if interest rates rise. This view is held almost universally, and certainly is held by Talkmarkets contributor Michael Ashton and Market Monetarist Scott Sumner.

Michael Ashton says this about it:

M2 money growth accelerated throughout 2016 as the economy improved, and ended the year at 7.6% y/y. Interest rates are rising, which will help push money velocity higher. It’s hard to see how that turns into a disinflationary outcome.
And Scott Sumner says this:

Economics is full of obvious truths that sound odd when expressed in an unfamiliar way. Everyone knows that the real demand for money slopes downward, as a function of the nominal interest rates.  It’s in all the textbooks.  If you raise the opportunity cost of holding base money (the interest rate) people will hold less base money.  It’s basic supply and demand.
 The definition of demand for money comes from William Spaulding:

The demand for money results from people's desire to hold money. When the money is held — not spent or invested — then it does not contribute to the velocity of money. Money velocity increases only when the people spend or invest it.
Sumner does admit in his article that after 2008, IOR (interest on reserves) is paid out to the banks, giving the banks incentive to hold money. When money is being held, it is not being spent. As interest rates rise, the banks get higher rates on the money sitting, doing nothing, the IOR goes up. So, the banks have even greater incentive to stop lending into the real community. They are hoarding money.

And we know that bonds are being hoarded, no matter how low the yields are. This is not the way classic money theory works. And it turns out that this bond hoarding actually disproves the Keynesian concept that:

When interest rates are low, the opportunity cost of holding money is low, and the expectation is that rates will rise, decreasing the price of bonds. So people hold larger money balances when rates are low. Overall, then, money demand and interest rates are inversely related. [Emphasis mine]
Actually, we have massive money balances being held. Keynes was right about that. But we also, at the same time, have massive hoarding going on in bonds. That disproves Keynes. It all should be in money not in bonds. There is literally so much money at the top of the financial food chain, that both bonds and cash are being hoarded.

So, the likelihood of money velocity increasing is low. Bonds are no longer an investment different than cash. They are like cash, equivalent to cash.

So, the holding of bonds as cash and cash as cash is very misleading regarding velocity of money on main street. It isn't likely to happen as long as wealth is holding all this useless money/bonds. Face it, money velocity is comatose.

And Davos people like Ray Dalio wonder why populism is rearing its ugly head in the face of all this wealth! This wealth lives in the financial economy, not in the real world economy. In the real world everyone is strapped. Unfortunately, if supply side economics is the way Trump and everyone chooses to fix this, Will Rogers will have been proven right again. It won't work. It is just a scam to keep the wealthy, well, wealthy.

Again, Kyle Bass has it right, that the only way out is helicopter money. He is more like Will Rogers than anyone could ever think. Helicopter money is the concept of giving money to the people at the bottom and that is exactly what Will Rogers said should be done.  
  




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